Between 2007 and the end of 2008, the S&P500 lost almost 57% of its value in 517 days. Although it looks like a bloodbath, a billionaire investor warren buffet called it “an ideal time for investors”.
Buffett’s view is more than positive – it’s an actionable lesson for investors in bear markets. The context for this comment was Buffett’s 2009 letter to shareholders of Berkshire Hathaway, the conglomerate he leads. In that letter, he had this to say about one of the worst stock markets reverse of history:
We have invested a lot of money during the chaos of the past two years. This is an ideal time for investors: a climate of fear is their best friend.
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Fear creates opportunity
Fearful investors sale. The large-scale sell-off reduces demand and depresses stock prices, further fueling fear. Buffett likes these cycles because they create opportunities to buy good stocks at a discount.
To be clear, a decline in the stock price is not always a good thing. Some stocks fall because the company’s ability to generate shareholder value deteriorates. At that time, the stock is worth less than before.
But when investor sentiment is largely responsible for a slowdown, good stocks are also losing value. And it’s an opportunity for investors to buy shares at a discount. It’s like buying designer shoes on sale – the quality is still there, but the price is lower.
Make friends with this bear market
It’s been about 13 years since the 2007 bear market bottomed, and stocks are in trouble again. Since January 3 of this year, the S&P 500 has fallen about 20%.
Buffett responded by making Berkshire Hathaway money work. According to the company’s 13F filing, Buffett poured tens of billions into stock purchases in the first quarter. However, in the second quarter, the market continued to decline. If Buffett sticks to his old ways, he’s probably still buying.
If you’re ready to deploy Buffett’s strategy, befriend this bear market, and improve your wealth-building potential, here’s how.
- Identify the stocks you like. Not all stocks are good candidates for buying in a bear market. Choose companies with strong balance sheets and a good track record to handle downturns. These should be stocks you are comfortable owning the long term.
- Know your budget and timeline. Investing in a bear market is not a get-rich-quick scheme. You cannot predict how long the bear market will continue or when a recovery will come. It could take six months or six years. Confirm that you can live without your invested funds for at least five to ten years.
- Invest in installments. Invest small amounts each month rather than a large amount at a time. This way, you can reevaluate your appetite for investing as economic and market conditions change.
Benefits of Investing in a Bear Market
The basic formula for making money in the stock market is to buy low and sell high. Strategic investing in a bear market addresses the buy low part of the equation. You can sell full price later – if you need cash – after waiting for the market to rebound and start growing again.
Investing in the bear market can boost your long-term wealth potential, but it’s not for everyone. You’ll need the cash on hand and the stomach to invest when stock prices fall, as well as the patience to wait for a rally. With these caveats, the strategy that works for Buffett may also work for you.
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Catherine Broc has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.